One of the motivations advanced by Brexit supporters for the
UK to leave the EU is that it will be able to save billions of pounds each year
in budget contributions which can be put to more profitable use at home. But it
is becoming increasingly clear that the UK will not be able to reduce its EU
budget contributions as quickly as many Brexiteers believe. Indeed, it is
increasingly likely that the EU negotiating team will announce that settling
the UK’s account will be the key item on the EU’s list of negotiating points
once the Article 50 legislation is triggered. Moreover, it may decide that it
will not discuss matters such as trading arrangements, which is the UK’s number
one priority, until agreement on this issue has been reached. I can imagine the
spluttering outrage from the UK press already.
Various estimates have been bandied about but the consensus is increasingly homing in on a range between €40bn and €60bn, which equates to around 4 to 6 years of current net contributions. In order to understand where this figure comes from, I am indebted to a paper (here) by the FT’s Alex Barker, which breaks the costs down into their constituent parts.
According to Barker, the UK’s obligations can be broken down into three main areas: legally binding contributions to which Britain has already signed up; pension contributions and contingent liabilities that would only become payable in certain circumstances. It is far from clear of the extent to which the UK will actually be liable for financial contributions after departure. Some form of agreement is likely on areas such as project commitments which have been made but not yet paid for. But a considerable chunk of the EU’s outlays form cohesion payments designed to reduce regional income inequalities, which have so far only been promised and will not become budget commitments until the 2020s.
Barker makes a very insightful observation when he notes that the EU’s budget differs hugely from the system of accounting used in UK public finance discussions. The EU splits its accounts into commitments and payments, in which the former measures what the EU plans to spend on a particular project whilst the latter represents what it actually pays in a given period. This is a political workaround to balance out what the EU wants to spend against what its members are willing to pay. By contrast, the UK operates on an accruals basis whereby payments appear on the budget only when they are actually made, and future plans only include what the government actually intends to commit. Under the British system, the government cannot commit to paying something which is not already budgeted for. The balance between actual and planned commitments on the EU budget is expected to reach €241bn by 2018, of which the UK’s share would be €29-36bn according to Barker’s calculations.
The next biggest item on the agenda is existing structural fund commitments. These appear as a liability on the EU accounts which in Brussels’ view must be paid. By end-2018, the EU’s commitments are expected to total €143bn, of which the UK will be on the hook for between €17 and €22bn. It is unlikely that the UK will be able to dodge much of this bill. But the most contentious part of the exit bill will undoubtedly be pension payments to EU officials. The EU operates an unfunded defined benefits scheme with liabilities of almost €64bn. Barker quotes Eurostat calculations which suggests that “in 2014, the average retirement benefit was €67,149 a year” which is a very comfortable sum. Whilst the UK might offer to cover the pension costs of British nationals working for EU institutions, the Commission will almost certainly argue that officials of all nationalities worked on behalf of all EU members. As a consequence, the UK will be liable for a pension bill of between €7.5bn and €9.5bn.
Allowing for other small liabilities, and the offsetting impact of the UK’s share of EU assets, we arrive at the likely bill of between €40bn and €60bn. Barker’s paper outlines the legal issues in some detail and interested readers are advised to have a look. In summary, the UK is likely to argue that it cannot be held liable for unfunded commitments if the EU chose to live beyond its budgetary means, and thus should not be required to pay for the gap between commitments and payments. However, it has always struck me as odd that the UK argued that the “international law principle of equitable division” would be applied in the event that Scotland voted to leave the Union in 2014 whereas today it is trying to get away with paying as little as possible.
Whilst the question of the Brexit bill is a matter for negotiators (not to mention accountants and lawyers), the British public has not yet been made aware of the fact that it will have to pay a hefty price to leave. It is not as simple as ceasing payments upon exit as we enter a land of milk and honey. Apparently, around 42% of marriages in the UK end in divorce. Every one of those people knows that aside from the emotional issues involved, there is a hard reckoning to be had as assets and liabilities are divided up. This is exactly what will be involved in the Brexit negotiations. They did not tell us anything about this during the referendum campaign, but watch out for a press backlash coming to a tabloid near you as we discover that divorce is costly, protracted and often bitter.
Various estimates have been bandied about but the consensus is increasingly homing in on a range between €40bn and €60bn, which equates to around 4 to 6 years of current net contributions. In order to understand where this figure comes from, I am indebted to a paper (here) by the FT’s Alex Barker, which breaks the costs down into their constituent parts.
According to Barker, the UK’s obligations can be broken down into three main areas: legally binding contributions to which Britain has already signed up; pension contributions and contingent liabilities that would only become payable in certain circumstances. It is far from clear of the extent to which the UK will actually be liable for financial contributions after departure. Some form of agreement is likely on areas such as project commitments which have been made but not yet paid for. But a considerable chunk of the EU’s outlays form cohesion payments designed to reduce regional income inequalities, which have so far only been promised and will not become budget commitments until the 2020s.
Barker makes a very insightful observation when he notes that the EU’s budget differs hugely from the system of accounting used in UK public finance discussions. The EU splits its accounts into commitments and payments, in which the former measures what the EU plans to spend on a particular project whilst the latter represents what it actually pays in a given period. This is a political workaround to balance out what the EU wants to spend against what its members are willing to pay. By contrast, the UK operates on an accruals basis whereby payments appear on the budget only when they are actually made, and future plans only include what the government actually intends to commit. Under the British system, the government cannot commit to paying something which is not already budgeted for. The balance between actual and planned commitments on the EU budget is expected to reach €241bn by 2018, of which the UK’s share would be €29-36bn according to Barker’s calculations.
The next biggest item on the agenda is existing structural fund commitments. These appear as a liability on the EU accounts which in Brussels’ view must be paid. By end-2018, the EU’s commitments are expected to total €143bn, of which the UK will be on the hook for between €17 and €22bn. It is unlikely that the UK will be able to dodge much of this bill. But the most contentious part of the exit bill will undoubtedly be pension payments to EU officials. The EU operates an unfunded defined benefits scheme with liabilities of almost €64bn. Barker quotes Eurostat calculations which suggests that “in 2014, the average retirement benefit was €67,149 a year” which is a very comfortable sum. Whilst the UK might offer to cover the pension costs of British nationals working for EU institutions, the Commission will almost certainly argue that officials of all nationalities worked on behalf of all EU members. As a consequence, the UK will be liable for a pension bill of between €7.5bn and €9.5bn.
Allowing for other small liabilities, and the offsetting impact of the UK’s share of EU assets, we arrive at the likely bill of between €40bn and €60bn. Barker’s paper outlines the legal issues in some detail and interested readers are advised to have a look. In summary, the UK is likely to argue that it cannot be held liable for unfunded commitments if the EU chose to live beyond its budgetary means, and thus should not be required to pay for the gap between commitments and payments. However, it has always struck me as odd that the UK argued that the “international law principle of equitable division” would be applied in the event that Scotland voted to leave the Union in 2014 whereas today it is trying to get away with paying as little as possible.
Whilst the question of the Brexit bill is a matter for negotiators (not to mention accountants and lawyers), the British public has not yet been made aware of the fact that it will have to pay a hefty price to leave. It is not as simple as ceasing payments upon exit as we enter a land of milk and honey. Apparently, around 42% of marriages in the UK end in divorce. Every one of those people knows that aside from the emotional issues involved, there is a hard reckoning to be had as assets and liabilities are divided up. This is exactly what will be involved in the Brexit negotiations. They did not tell us anything about this during the referendum campaign, but watch out for a press backlash coming to a tabloid near you as we discover that divorce is costly, protracted and often bitter.
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